First Business Financial Services Inc (FBIZ) 2025 Q2 法說會逐字稿

Good afternoon. Welcome to the first business bank earnings conference call 2nd quarter 2025. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press 0 for the operator.

After today's presentation, there will be an opportunity to ask questions.

Please note that this event is being recorded.

I would not like to turn the conference over to First Business Financial Services Inc. CEO Corey Chambas. Please go ahead.

Good afternoon everyone, and thank you for joining us. We appreciate your time and your interest in First Business Bank. Joining me today is our President and Chief Operating Officer Dave Seiller and our CFO, Brian Spielman. Today we'll discuss our financial performance, followed by a Q&A session.

I'd like to direct you to our 2nd quarter earnings release and supplemental earnings call slides which are available through our website at ir.firstbusiness.bank. We encourage you to review these along with our other investor materials. Before we begin, please note this call may include forward-looking statements, and the company's actual results may differ materially from those indicated in any forward-looking statements. Important factors that could cause actual results to differ materially from those indicated in the forward-looking statements are listed in the earnings release and the company's most recent annual report Form 10K and as may be supplemented from time to time in the company's other filings with the SEC, all of which are expressly incorporated herein by reference.

There you can also find information related to any non-gap financial measures we discussed on today's call, including reconciliations of such measures.

We are pleased to report another outstanding quarter.

As we work to achieve a 5 year strategic plan that is built to drive double digit growth on an annual basis.

Results for our 2nd quarter and first half of 2025 show that strategic plan at work.

During the quarter, our team again produced double digit core deposit growth that outpaced our robust expansion of loans.

We also maintained a strong net interest margin and saw a decline in net charge offs. Private wealth assets expanded significantly and fees grew. Operating revenue was solid, even with some expected variability in our fee income sources, showing the value of our revenue diversification strategy.

This drove pre-tax, pre-provision adjusted earnings up 13% over last year's second quarter, and EPS up 10%. ROA matched the linked quarter and year ago quarters showing great consistency.

Most importantly, tangible book value growth is a significant driver of stock valuation gains, and we grew tangible book value per share and impressive 14% from a year ago.

Before I hand it over to Dave, I want to acknowledge our recent announcement of my planned retirement and Dave's succession to CEO effective next May 2026. You are all very familiar with Dave and we're grateful for his outstanding leadership and his commitment to the future of First Business Bank.

Dave.

Thank you, Corey.

Balance sheet growth was a clear highlight again this quarter. You can see the quarterly highlights on slide 3 of the earnings call slides.

We continue to see exceptional growth with core deposits increasing 70 million or 11% annualized from the first quarter and up 10% from last year's second quarter. Another indicator of our great success in core deposit gathering is service charges on deposits, which grew 16% from last year's second quarter. I'll note that our growth trajectory has been outstanding, but as a business-only bank with larger average client balances, normal daily balance fluctuations can make a significant difference to period-end growth rates. We prioritize developing long-term relationships, and that requires a long sale cycle. So we tend to evaluate our success over a rolling four quarter view rather than period to period.

Loan balances grew about $267 million over the same period last year. That's up about 9%.

You can see our quarterly deposit and loan growth trends on slide 4.

We continue to see solid demand for our conventional and niche CNI products. Total CNI balances expanded 30 million or 10% annualized. This included growth within asset-based lending up 13 million, floor plan financing up $10 million and equipment finance up $7 million.

Activity levels in our asset-based lending group continue to exceed what we've seen in the last 2 years. We attribute this to current market dynamics and our new leader in asset-based lending, who is off to a great start.

We are positioned to capture growth opportunities in this space.

Our floor plan financing team also continues to see nice demand and extremely high client satisfaction results, which has led to a significant number of referrals.

On revenue, I'll cover a few areas quickly.

Private wealth is a true highlight for us. The consistency of its revenue generation, relationship development, and capital efficiency are extremely valuable to our company.

Private wealth assets under management grew an incredible 36% annualized during the quarter and were up 15% from a year ago.

Approximately 63% of our growth in assets under management during the past 12 months was from transfers from our new and existing clients.

Obviously there's a market component to this business that can drive variability, but as a revenue annuity stream, it is exceptional and growing.

We also saw a decrease in SBA loan sale premiums and fee income.

Like several of our fee income items, individual contribution levels can vary quarter to quarter. This quarter, the timing of closings and loans fully funding was a factor.

Additionally, we've closed a higher proportion of SBA construction loans, which has lengthened our overall timeline between loan closing and loan sales.

Pricing is extremely competitive right now, but we have a very strong team in place, and we continue to win deals.

Onto asset quality.

We are very pleased with our low level of net charge offs during the quarter, particularly the fact that they came from the transportation and logistics segment of our small ticket equipment finance portfolio, which was anticipated and is running off.

The $4.6 million dollar increase in NPAs was due to a single credit in the transportation and logistics sector of the conventional CNI portfolio.

In total, our exposure to this industry at June 30th was $75 million.

44 million in the conventional portfolio and 31 million in the small ticket equipment finance portfolio.

It is important to note that our exposure to this industry in the conventional portfolio is well collateralized.

As a reminder, we are no longer lending to the transportation and logistics industry in our small ticket equipment finance business.

This gives us confidence that our overall loss risk is relatively low.

We continue to be pleased that our overall portfolio is performing as expected, and we have no areas of particular concern.

Now I'll hand it off to Brian.

Thanks, Dave. The 2nd quarter margin of 367 reflects our continued strong balance sheet management.

You can see a breakdown of this on slide 6 of our arrange supplement.

Our margin includes fees and lieu of interest, which refers to the recurring but variable amount of interest income we earn from items like pre-payment fees and asset-based loan fees.

These declined by $379,000 from 11.

This contributed 18 basis points to reporter margin in Q2 compared to 23 basis points in Q1 and 27 basis points in Q4 of 24.

Excluding these and other variable items, our adjusted net interest margin rose 1 basis point to 347 for the quarter compared to both linked and prior year quarters.

We're very pleased with our ability to maintain a strong and stable margin in this environment. In the last month of the quarter, we added multiple meaningful new deposit relationships which enabled us to let some wholesale funding mature without the need to replace it.

A few additional notes on fee income.

In the other line, we saw a decrease of 369,000 in SBICCcom in Q2.

We expect this income should improve in the second half of the year as existing funds mature, though variability is always expected. We also expect to invest in an additional *** funds going forward as a long-term revenue catalyst and effective use of capital.

The same is true for Boy, which has favorable taxable equivalent yields and tax implications.

One administrative item is a reminder.

Last quarter, we reclassified certain types of CNI loan fees from non-interest income to fees and of interest in our net interest income line. So the second quarter of this reclassification was approximately 567,000 and it was 500,000 in Q1.

This affects year over year comparisons for net interest income and fee income but has no impact to total revenue.

Quarterly variability in specific line items reinforces the value of the fee income diversification we've worked hard to produce.

We continue to expect total fee income to grow in our long term target rate of 10% annually going forward.

Our expenses were well contained in Q2.

I'll reiterate that when we think about expenses, our primary objective is achieving annual positive operating leverage. That is, annual expense growth at some level below our targeted level of 10% annual revenue growth.

On taxes, our year-to-date effective tax rate of 15.8% is right around the lower end of our expected range of 16 to 18%.

We continue to believe this range is appropriate.

Finally, our strong earnings are generating more than enough capital to facilitate our expected organic growth, and we continue to feel good about our capital levels.

And now I'll hand it back over to Corey.

Thank you, Brian.

We're very pleased to report this strong quarter, but I hope we've continued to make it clear that we take a longer view.

So it's helpful to draw your attention to our year-to-date performance, which is outstanding.

Compared to the same period of 2024 in the first six months of 2025, we've delivered 10% growth in operating revenue, 18% growth in pre-tax, pre-provision earnings, 17% growth in net income, and 14% growth in tangible book value.

We're very optimistic about 2025 and beyond, and we believe our focus on strategic initiatives will continue to serve us well into the future.

I want to thank you for taking time to join us today. We're happy to take your questions now.

Thank you. Ladies and gentlemen, we will now begin the question and answer session.

(Operator Instructions)

Jeff Rulis from DA Davidson.

Thanks. Good afternoon. I wanted to check in on the bone growth side. Sounds like you, some constructive comments in there, some optimism, and I guess, the goal of 10%, and I appreciate Corey, you look from a longer term basis, but I guess as we look for the year, it's going to be kind of a stretch to get 10%, or is there some seasonality or some tailwinds that second half might might kick in a little stronger?

Yeah, I would say we're not far away, Jeff. We're running in the eights, so, we do some larger deals and it can move around quarter to quarter. So, we're still feeling like that's well in sight, not really a seasonal thing.

Dave, and I.

Just add.

So the last four quarters, we've been at about 8.9%, again, that's a deal or two away from 10%, and we've had pretty broad based. Growth in our conventional markets we've seen growth, particularly in our Southeast, which is our Milwaukee market and Northeast market, and then we've seen some nice growth in some of our specialty areas. So there's nothing we're seeing in our pipelines right now that would.

Have us back off of that.

Okay, I may have worded that poorly. I guess just, kind of you put up decent growth given a a year-to-date disruption macro wise, I guess trying to look for, of late, are you getting indications of increased comfortability from your business borrowers, further away from tariff noise and is there some.

I guess some more Wind at the back type of is is kind of what I'm getting at is this second half shape up any greater or is it pretty steady state?

I think it's pretty steady state, Jeff, the disruptions and on again, off again, things that have gone on have caused folks to.

Be concerned, cautious, maybe a little bit, and I think things have calmed some and the economy, continue to move forward in a strong way. So I think some of that uncertainty, hesitation is dying down a bit, so our borrowers are really not showing us any indication that they're going to do anything different than business as usual.

Gotcha. And my other question, just wanted to hop on the funding side and more deposits. The last few times we've chatted, deposit competition has heated up and we've seen, a little pick up in the deposit costs. Does that give you any pause or any threat to that kind of terminal net interest margin in the 360 to 365? Do you feel like that's shaken out where. Deposit pricing is becoming more challenging and and that's a threat to that level, or I guess expectations about deposit costs and margins combined.

Yeah, on the deposit cost front, it's always, it's not always, but it's been a challenge of late. We've always paid at the top tier of the market to be competitive and build relationships and so we're just seeing that that higher rates sticking for longer now. And so while we We're going to pay that rate. We don't think it has negative implications on our go forward look on on the interest margin for that 360 to 365 long term target.

Okay, thanks, I'll step back.

Daniel Tamayo from Raymond James.

Thanks. Good afternoon, guys.

So I guess.

Yeah, just, first on the, appreciate all the color on the increase in the NPAs on the specific transportation CNI loan that you had, just to be clear that that was the full amount of the increase in NPAs. I don't know if you guys gave the amount of that loan. I know you gave the the buckets which on the CNI and the small ticket side, but the specific loan that caused the increase in the MPAs, what was the amount of that?

About $6 million.

So that.

Was 4 something almost 6.

Million.

Got it.

And what's the, where does that loan stand now as it as it relates to reserves versus kind of the total loan?

Well, it's, we went through an impairment analysis and it's specifically reserved for, so we think to the point that it's at right now, it's fully collateralized.

Okay. All right. Helpful.

Thank you. I guess and then just to follow up but unrelated on the SBA loan loan sale gains you talked about.

Some of that in the prepared remarks, but just curious, given the increasing competition in the in the in the in the area, if you have any, I can't remember if you if you gave any specific guidance on where you think that line shakes out. I know it's volatile on a quarterly basis, but maybe on an annual basis where you think that that may shake out for the year.

So, yeah, I mean, as we've talked over the past few quarters, it does bounce around a little bit. I think 11.

Was A little higher than we were expecting originally Q2's down and we expect it to kind of bounce back closer to Q1, I think for the remainder of the year.

Okay.

Alright, so maybe Let's see here, yeah, okay, alright, that's helpful. All right, well I will step back. Thanks for the call guys. I appreciate it.

Your next question comes from the line of Damon Del Monte from KBW. Your line is now open.

Hey, good afternoon guys. Hope you're all doing well and thanks for taking my questions just to circle back on the transportation portfolio.

I guess, how are you feeling about the remainder of the portfolio? Are there any other like early signs or building signs of more degradation in that portfolio?

Well, I think, we look at the two pools of that, right? One is our equipment finance, transportation loans, which continue to, run off, and, those things were, we stopped lending in that area in May, I believe of 23, so those things are.

The loans that are left are becoming fairly seasoned, so we would like to think that the, number of non-performers from that group is going to continue to decrease. On the conventional side, things seem to be holding okay. The difference between the conventional side and the equipment finance side is that the conventional side generally has much, stronger collateral coverage.

Got it. Okay.

That's helpful, thanks. And then with regards to kind of the outlook here for expenses, Brian, do you think you kind of, just show modest growth off of like this quarter's level or kind of how do you feel like the back half of the year shaping up?

Yeah, I would say typical modest growth. We're going to continue to hire where we need to. We'll have the seasonal offset of Social Security expenses going down.

We're at a point now with some of our, technology spend, that that's being capitalized and more of just a lower run rate there. So, I feel good about our ability to drive positive operating leverages on an annual basis here still in 25, so.

Okay, great. And then I guess just lastly on the provision outlook.

Absent any other loans moving into non-performing status, we just kind of think about it just from enough to support growth and kind of keep the reserve level flat with modest charge off that a fair way to characterize it and look at it.

Yeah, it's a fair way to characterize it. I would say the last three quarters have been in that 2.5 to 2.7 million, and, that run rate, seems real.

Realistic or reasonable for What we're seeing for growth.

Charge us we're down a little bit this quarter, so that that's a good indicator on a go forward basis, and the thing we can't control really is some of the inputs into the Cecil model relative to the economic forecast, go forward forecast. So, that's always a bit of a wildcard, for all, for all banks as you well know.

Yes, got it. Okay, appreciate the the caller. Thanks a lot.

Your next question comes from the line of Nathan Rees from Piper Sandler. Your line is now open.

Hey guys, good afternoon. Thanks for taking the questions.

Curious, just as you're thinking about opportunities to grow core deposits, I know that pipeline isn't as visible in terms of maybe what you have going on on the commercial side of things, but just curious kind of how you guys see, core deposit growth trending, excluding brokers and CDs in the back half of this year, and just maybe any targets over the next year or so in terms of where you'd like to see wholesale funding get down to, I know, wholesale funding is a part of the model in terms of how you match fund. Some of your commercial real estate growth but would appreciate any thoughts along those lines.

I'll go, to the back half of your question there, Nate, to begin, and our goal from our strategic plan is to be about 75%.

For in market deposits 25% wholesale funding and that's a kind of a plus minus maybe 5% percentage points. Because it really depends on our match funding needs and what our borrowers are doing on term financing, and if they're using swaps, we don't need as much if they want a fixed rate, we need a little bit more. So kind of really anywhere in that range is works well for our neutral balance sheet, which, as we kind of pride ourselves on and and stick to strategically. So that 75. Plus minus is the range that we we like to strive for, as far as pipelines and growth going forward, Dave, you want to take that?

Sure, as far as pipelines and growth in the back half, I don't think I'd expect anything different than the front half. We TRY to do the same thing. We TRY to be outbound our treasury management people are outbound active calling. Again, we look at, we like to look at our, service charges on deposits, which have grown 16%, over the past year, I believe, and, that just shows us, that's, that shows us that there's good consistent calling and new accounts being added, and so we expect to keep doing the same thing and. Deposits are a bit lumpy, so you're going to see them a growth a little higher in one quarter than the next, but overall we think we can, match the pace of our loan growth.

Yeah, so, oh yeah, big picture, I'd say net net, if we're going to grow our loans 10%, we've got to grow our deposits 10% quarter to quarter. That 10% might be a little more wholesale one quarter, a little more in-market one quarter, but that will equalize out and that again, why we kind of look at a rolling four quarter basis on that as well.

Okay, great. That's really helpful and Brian, you mentioned, you guys are going to obviously remain competitive, driving, core deposit growth going forward, but just curious, what you're seeing from a competitive perspective these days among some of both the larger and smaller institutions that you can be with. Are you seeing any more, rational pricing these days or any notable changes from a competitive perspective, within the last 90 days or so?

I would say it's competitive as ever. So I think we, well it's, frustrating, I think we feel good about it for us because we can pay what we need to pay, yet we still have the ability to price our assets accordingly, especially in some of those and I lending areas where it gives us the ability to still drive that 360 to 365 margin here going forward. But yeah, it's.

Just as competitive as it has been. Yeah, and I, I'll just tack on to that. As Brian said, the the CNI growth is faster than the CRE growth over the last couple of years. That continues to be our strategy, and that plays well with the need to be able to have a bit higher yield, which we do on the CNI book overall to, 200.

Basis points are so higher than the than the CRE book and it's a good thing that we've been growing that and continue to expect to do that because deposits are just more expensive for everyone. And if you're a growth oriented company like we are, we've got to bring in new deposit relationships. If you're a bank that's just kind of stagnant and not really growing. You don't really have to do that, but, fortunately, our model is such that we're able to do it and maintain the margins.

Right, appreciate that. Maybe one last one, Brian, can you just update us in terms of kind of the margin sensitivity, to, short term rates in terms of maybe, what we could expect from a margin impact if we do get a Fed cut at some point in the back half of this year.

Yeah, happy to.

So we're just slightly, well, I reminded we want to TRY to be neutral. We're just slightly asset sensitive as of as of Q2, but that's really more just a function of some of that short term cash we have on the balance sheet. We plan to put that to work in the second half of the year. Our models is to get in the queue will indicate some downward sensitivity on the up 100s and 200s, but very immaterial, and that's the instantaneous shocks as well. So we feel really comfortable about our ability, given our neutrality to manage deposit bettas, if and when they start cutting rates to again drive towards that 3 or drive, maintain that 360 to 365.

Which we're running a little higher than that right now. So there's a little bit of a few basis points of compression built into that assumption.

Okay, but it sounds like, once that cash is redeployed, your the beta should be pretty well matched on both sides of the balance sheet.

Right.

Great.

I appreciate all the color.

Thank you, everyone.

Thanks.

Your next question comes from the line of Brian Martin from Janie. Your line is now open.

Hey, good afternoon, guys.

Right.

Say, I'm not sure who, but just I think you guys talked about, some wholesale funds maturing this quarter. I just wondering what if that has implications for the the near term margin given that I don't know when that occurred in the quarter, but just trying to understand the impact that may be having given.

That in later.

In the quarter.

Yeah.

Good question. So basically.

It was a function, and this is what we always do. We tend to have to have some shorter term wholesale funding. We're rolling one week advances as we're looking to place funds out on a curve for our mash funding or we're waiting for core deposits to come in. And that was the case this quarter where we had, roughly $100 million of short-term advances floating, rolling every week, and that was then swapped out with, the $100 million plus of core deposits. The weighted average rate of those is pretty consistent, given some of the duration we had in the in the CDs. So really what we're seeing is a push on that interest margin given that mixed change, even given the size of it. So I feel good about our ability to again maintain that.

That margin target.

Gotcha. Okay. And then just your point earlier, I'm not sure who said it, but the mix of the loans, I'm just wondering what the, how the specialty trends were this quarter versus the traditional and just kind of where you see that trending to, the next, 12 to 18 months if you will, and it was I thought last quarter was around the low 20s in terms of percentage, but just, how is the mix this quarter and just your outlook there would be helpful.

Yeah, we've, the, we'd like to see that mix move up a little bit on some of the niche lending areas we've seen really good activity in ABL as Dave mentioned, and so we expect that to continue, and, we would look for our floor plan plan business to continue to grow. That's been a really steady and growing business for us. Those would probably be the two areas that we'd be looking for the most growth in the near term.

Gotcha. And and and as far as just longer term, like, longer term target and the percentage of where you think that kind of shakes out or where you'd like to see that be, is it, if it's in the low 20s today, is that, trending toward a 30% type of level? Is that too aggressive in terms of where you want to get to over time?

I think it's a little, well, over time, depends what how long over time means, but I think over time, yes, that makes sense. Maybe that that moves to 30, but the tricky part is we're, it's sort of chasing a runner with a head start because our commercial standard commercial and our standard CRE business keeps growing. So that's not standing still. So to push that up.

Percentage up, we've got to do even more. So I would see that it's been as high as 26% is my recollection was the highest it's been.

We've had some softness and a couple of lines there in the last couple of years, particularly the ABL was soft for a while, and that's moving again. So I think we closed that GAAP again and, I would hope that that's getting more toward 25%. In the next year or so and then maybe moving up a little bit because I think when we were when we were gaining ground on that percentage in our last strategic plan, we went from 16% at the beginning of that 5 year plan to up to 25%. So you know we're at that point we're moving along pretty good a couple percentage points a year or so. So you know that could be 1, 2% a year if we're successful in in growing those business lines like we'd like to.

Gotcha. And in those business lines, whether this quarter or this year-to-date, and they've been pretty stable. I mean, I guess they're they're just keeping pace. They've not really outgrown in the first half of this year relative to the other.

Portfolios. Yeah, I think that's a fair characterization.

I'd say floor plans outgrown.

But the other ones probably are pretty.

Consistent in line more in line, yes.

Yeah, okay. And then, maybe just one last one for me, just I don't when the cue comes out, just, the trends in Criticize loans or criticizing and classified any, outside of this, the one, credit you've talked about any changes to, anything notable in in those two numbers for the, quarter.

There there's not the material note there that we're aware of, and like you said, Akio sees trends are pretty consistent.

Yeah, okay, just making sure. So, okay, I appreciate you guys taking the questions. Thanks guys.

B There are no further questions at this time. I will now turn the call over to Cory Chambas. Please continue.

Thank you for joining us today. We appreciate your time and your interest in First Business Bank, and we look forward to sharing our progress again next quarter. Have a great day.

Ladies and gentlemen, this concludes today's conference call.

Thank you for your participation. You may now disconnect.